Young Danes’ burden of debt accelerates early

10 March 2014

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​A new analysis by the Danish Bankers Association indicates that the indebtedness increases seriously in the early ages, but it also shows that financial literacy and skills in personal finance peak late in life.

The results underline that there is a mismatch between when the debt is established and the level of financial knowledge. According to Deputy Chief Executive of the Danish Bankers Association Louise Mogensen, this clarifies the need for early intervention in relation to improving skills in personal finance.

"We see that the burden of debt accelerates early, but it is also among the young people that financial literacy is lowest. The young do not know enough about basic personal finance concepts such as interest rates, loans and budgets, and it is a challenge because we can see that they are taking major economic decisions such as getting into debt. Therefore it is necessary that we get young people equipped with better financial literacy as they get their first own money, for example from afterschool jobs and confirmation. "

The Danish Bankers Association has just initiated the first Danish Money Week, which is a nationwide effort to raise children’s and young people’s financial literacy and focus on teaching in personal finance in lower secondary classes.

"The Money Week and more teaching about personal finance is to prepare young people to better keep track of their own finances so that fewer end up in unmanageable debt problems, which in the worst case can lead to a registration in RKI as a bad payer," Louise Mogensen continues.

The debt is incurred early

The Danish Bankers Association has, in an analysis, looked at debt behavior among young people aged 18-29 years, including a focus on when young people go into debt and on which groups are particularly indebted.

The analysis shows that debt varies considerably from a young person is 18 years old to the person turns 29 years old, and that it is especially in the early ages that indebtedness increases. For people under 25, the proportion of debt relative to income increases by an average of 33 percent per year, as opposed to the 25-29 age group where it only grows by 5 percent.

Viewed over a longer time perspective, the picture is also clear. The debt more than doubles in the early ages, while among older groups, it remains at a fairly constant or decreasing level.

Figure 1. The debt ratio by age group 2011

Note: The debt ratio indicates the proportion of bank debt in relation to the individual’s personal income (excluding investment income). It looks at people without owner-occupied housing.

Source: Own calculations based on data from Statistics Denmark

Young people have poor financial literacy

A&B Analyse has, for the Danish Bankers Association, made an extensive survey that tests the Danes’ financial skills and knowledge. The test includes six questions about personal finance, and places the Danes on a scale of 1-6 based on the number of correct answers.

The study shows that the financial skills first peak late in life while young people will have the poorest understanding of personal finance. Thus, it is only every other young person aged 15-24 who has good financial literacy, while the corresponding applies for 2 out of 3 in the older age group of 55-64 year olds.

Figure 2. The Danes’ skills in personal finance by age

Note: Individuals with 4 correct answers or less are characterised as having poor financial literacy, while those with 5 or 6 correct are characterised as having good level of financial literacy.